Leverage is a way of looking at how a firm balances its capital. One example is a debt to equity ratio which puts debt in the numerator and equity in the denominator to see how highly "leveraged" a firm is. The higher the debt to equity ratio, the more leveraged the firm. Debt is more risky than equity because it comes with a legal obligation to pay your creditors. However, debt is, usually, cheaper than equity.

1) Given the above, if a firm has a high debt to equity ratio, what does that mean about the riskiness of the firm; More risky or less risky?

Financial leverage affects a firm's ROE calculation. Let's think this through... Financial leverage can be increased in two ways:

2) By increasing the amount of Debt or Security?

3) By decreasing the amount of Debt or Security?

4) If a firm increases its financial leverage, what effect might that have on its ROE; Increase its ROE or Decreasing its ROE?